Choosing the right loss leader product

The definition of a Loss Leader item is something that you’re selling at or below cost and heavily promoting. It doesn’t matter how you promote it. You can use any combination of via Pay per click, newspaper or purchase air time on radio or television, the tactic is to slash the price of a single item and then promote it like crazy to get attention in an over crowded media marketplace. In “Beyond Niche Marketing” the loss leader promotion illustrated in the book involves drug stores selling milk.

A conversation with my mother, of all things, brings the loss leader marketing tactic and brought to mind the type of product that should NEVER be featured as a loss leader.

My weekly call to my 70 year old mother last week finds her shopping online for “stevia”. Stevia is an herb that’s advertised to be “sweeter than sugar”. It’s non-caloric and is a favorite among diabetics and dieters. My mother is a life long member of the latter group and is still fighting the fight to fit into her wedding dress some 45 years later.

So our tale begins in the middle of rural Indiana, where there’s a 70 year old woman who is frustrated by the fact that a few months ago she purchased Stevia online for approximately $4.00 per box and now she can’t find it anywhere at that price. She had searched the web store where she made her original purchase and, at the time of my call, had abandoned that search and headed out in the wilds of the internet in search of Stevia for $4.00 per box.

In an effort to make conversaion, I began explaining to my mother that the fabulous $4.00 per box purchase price was probably a “loss leader” promotion. The business in question probably purchased a Google Adwords ad which my mother clicked upon, found the herb offered at an INCREDIBLE price and, as a result, she bought 3 boxes. The promotion was over and my mother should abandon her quest and get back to our conversation.

My mother wasn’t having any of that. (Tell me you don’t have conversations like this with your mother too.) What she did care about was she had bought Stevia at $4.00 per box three months ago and by gum, she wasn’t going to pay twice that much for it now.

The conversation with my mother ended but it got me thinking it was time to explore the topic of why some products SHOULD NEVER be used as loss leaders.

In economics, DEMAND is the amount of a good that consumers are willing and able to buy at a given price. According to Biz Ed, there are 5 factors that come into play which affect DEMAND for a good:

1. the price of the good;
2. the income of consumers;
3. the demand for alternative goods which could be used (substitutes);
4. the demand for goods used at the same time (complements);
5. whether people like the good (consumer taste).

We could spend weeks on this topic, so for now we’re going to focus our attention on the third item from the list, the demand for alternative goods which can be used as substitutes.

When there are a LOT of alternatives for a good, then the demand for that good is said to be elastic. Conversely, items that don’t have acceptable alternatives or substitutes are said to be inelastic. Think of rubber bands. Big fat thick ones with very little give are inelastic -vs- thin rubber bands with LOTS of stretch are elastic.

Gasoline is a product whose demand is INELASTIC. It’s rubber band is very thick and very “no-stretchy”. This is because there is no substitute product for gasoline. Our cars are built without alternatives in mind, so the demand for gasoline is said to be inelastic.

While gasoline as a product has demand that is very INELASTIC, which gas station you use to fill up your car is HIGHLY elastic. If station “A” is offering gas at $2.86 a gallon and right across the street, station “B” is offering gas at $2.96 per gallon, which gas station is going to have customers lined up around the block? This is because demand elasticity for individual gas stations is very ELASTIC.

1. When you’re choosing a loss leader product, be sure to choose one that has inelastic demand.

Milk is the example used in the book as a potential loss leader product. Milk is considered inelastic because there are no good substitutes, it is a necessity to most people, and it represents a small proportion of most people’s weekly food budget.

While there are other substitutes available for milk, try mixing any of them with chocolate milk mix and see if your 5 year old doesn’t notice the difference immediately. The demand for milk is said to be inelastic because substitutes are more expensive and not easily slipped by without notice on the typical 5 year old’s palate.

Back to the web store selling stevia. This web company made an obvious mistake by featuring as a loss leader a product whose demand is highly elastic. While my mother prefers stevia to other sugar substitutes, when the price doubled, she quickly abandon her search for stevia and headed straight to the little pink/yellow/blue packets of artificial sweetener offered at her local Supercenter.

2. Make certain you stick with your loss leader campaign long enough to establish your relationship with your customers.

Unfortunately, the herb web company positioned itself as a commodity broker of herbs. They won the battle by momentarily offering the lowest price but they lost the war. When their customer returned and found the price had doubled, she beat a hasty retreat. The loss leader promotion not only failed to win a customer, it garnered her ire and she’s now calling her other herb consuming friends complaining about the injustice suffered at this site.

The online herb broker tried a “quick hit” campaign, toying with the idea of offering a loss leader. Not only was the demand for their PRODUCT very elastic, but the demand for their STORE was also very elastic. In other words, not only were there lots of acceptable substitutes for the PRODUCT but there were also lots of acceptable substitutes FOR THEIR STORE.

This is a lethal combination.
Pat attention to what your local grocery store does in promotion. Your local grocery stores are most certainly the local JEDI MASTER of the minor sale. If you’ll notice, when your local grocer runs a loss leader product, the ad copy will usually specify, “Limit 2 with $20 purchase” or something to that effect. They frequently implement the loss leader marketing tactic as a way to maintain their market share.

Watch your local grocer’s marketing efforts and see if you can point out the “loss leaders”. While the loss leader products may change, the strategy doesn’t. Notice that most grocery stores are carefully positioning themselves as selling a lot of PRODUCTS who have high demand elasticity but the stores are carefully moving themselves into a position of low elasticity. In other words, you probably have a favorite grocery store and it’s because that store has done something to position itself as your favorite. Whether it’s the fresh seafood, the olive bar, the selection of exotic produce, or the deli selection, your favorite grocery store is doing everything it can to position itself so you won’t travel 10 minutes down the road to the next grocery store.

The online herb store, on the other hand, didn’t do anything to “hook” their customer. When they abandoned their loss leader tactic, there was no reason to shop there anymore. By not designing their web store to encourage add on purchases, they set themselves up for failure.

So use caution when choosing your loss leaders for your minor sale campaigns. On the web, set up your shopping cart to offer “customers who purchased “X” also bought..” messages. Amazon, the Jedi Master of minor sales on the web, combines this strategy with offering free shipping for orders over $25.
On or off the web, make sure your customers know the loss leader product is being offered at a special sale price and when the promotion will end. It’s good to rotate staple products as loss leaders to keep customers coming back for more. Just make sure the offer is clearly defined and if necessary, clearly spell out the conditions of the sale. You’ll find your customers won’t mind buying $20 worth of merchandise to save $2.00 off of a $6.00 product and you’ll find that loss leaders can indeed make a profitable contribution to your bottom line.

The Loss Leader tactic is a classic promotion for businesses making minor sales. Just make certain you’re committed to the strategy before you begin.